According to Arola, Align, a public company for the last 12-13 years, has been greatly successful in the malocclusion market, serving nearly 2 million patients. In this time, Align delivered 75 to 80 million aligners, the company’s class II medical devices and generated more than $2 billion in revenues.

Currently the company is focusing on four important areas of development. The first point of focus is to introduce clinical innovations to help doctors work more efficiently. The second focus point of the company is educating customers about the know-hows of Invisalign, the company’s core product.

Invisalign is an exclusive method to treat malocclusion based on a series of doctor-prescribed, custom manufactured, clear plastic removable orthodontic aligners. The Invisalign system offers a range of treatment options, specialized services, and proprietary software for treatment visualization and comprises several phases. Arola claims that educating patients would improve Align’s customer base, as this would help patients understand the capabilities of Invisalign, thus pushing doctors toward using the product.

The third emphasis of the company is customer experience, which will help the doctors to prepare ClinCheck approvals. Last but not the least is Align’s strategy of international expansion. Primarily, the company plans to improve the adoption of Invisalign in the core markets of Europe and China. A year back, the company had opened some offices in four major cities across these regions.

Notably, cases shipped to the international market during the last reported quarter were 22,6000 (representing 23.7% of total worldwide volume), a year-over-year increase of 35% and a sequential increase of 13%. Despite macroeconomic concerns in Europe, the company benefited from its solid direct business model. Its Asia-Pacific (:APAC) business also did well. In Europe, there was balanced growth across all countries including the U.K. During the quarter, the company launched Invisalign i7 in the U.K., a seven stage aligner offering for minor crowding and spacing.

Moreover, China and Japan are also exhibiting strong growth.In China, the launch of Invisalign during the second quarter of 2011 was also followed by the introduction of Invisalign 4 and Invisalign Teen in that region. The company believes that the new features and functionality delivered with Invisalign G3 and G4 are even more effective outside North America, especially in Asia, due to the higher complexity of cases among the Asian population.

Last year, Align acquired a privately-held Cadent Holdings, a provider of 3D digital scanning solutions for orthodontics and dentistry practices and maker ofthe iTero and OrthoCAD iOC scanning systems. According to Arola, utilizing Cadent’s products, Align will be able to boost placement of Invisalign in the market.

Align believes that intra-oral scanning will become an important part of the normal dental practice. At present doctors submit PVS impressions of the patient's dentition to Align to start a new Invisalign case. However, through intra-oral scanning, doctors will be able to submit fully digital intra-oral scans of the dentition instead of a physical impression, an option that is more user-friendly for the doctors as well as more comfortable for the patients.

We believe that based on its several strategic initiatives, Align will continue to exhibit strong growth momentum. Banking on its core product, Invisalign, the company witnessed balanced sales growth across all its channels. Cadent’s contribution is also helping Align to further expand its presence in the malocclusion market.

Moreover, its focus on the international market, especially Europe and China is encouraging. We are also encouraged with the company’s new product development and believe that the newly introduced Invisalign G4 platform will lead to solid revenue growth. Considering the strong untapped potential of the malocclusion market, we are optimistic about the prospects of the company, which retains a Zacks #2 Rank (Buy) in the short term.

However, the current economic uncertainty continues to cast a negative impact on dental procedures because of its elective nature. Moreover, the company faces significant competition from players such as 3M (MMM), Danaher Corporation (DHR) and Dentsply International (XRAY). This resulted in a continuous decline in the international ASP over the past few quarters. We also remain concerned about increased expenses leading to contraction in the gross margin. We currently have a Neutral recommendation on the company in the long term.